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22 Seiten, Note: 1,1
Regulatory Framework: Categories of Regulated Fund
Authorisation of OEICS
Authorisation of AUTs
Operational Requirements: UCITS and NURS
Investment Trust Company
Marketing the Fund
Taxation of the AIF
Operational and Organisational Requirements
Terminology: ‘Authorised Persons’ and ‘Approved Persons’
Proposed Changes And Developments
Appendix A. Hedge Fund Investment Partnership
The hedge fund industry made its comeback in 2010 exhibiting an imposing growth. Global hedge fund assets augmented 11 percent to USD 2.02 trillion by the end of 2010 up from USD 1.82 trillion in the previous year. This took the industry back up to levels last seen in 2006 although still below the 2007 historic peak of more than USD 2.6 trillion. These capital inflows at a growing rate indicate that (institutional) investors keep on perceiving hedge funds as attractive alternative investment vehicles differing from traditional asset classes (Helleiner & Pagliari 2010). Despite highly unstable and recessionary markets, many hedge fund managers succeeded in delivering robust returns.
The hedge fund industry in the UK really started to take shape in the 1990s. A number of factors made for fertile conditions for its success, including:
- the deregulation of the London Stock Exchange in 1986 (known as ‘Big Bang’), increasing access to financial markets;
- London's pre-eminence as a financial centre and the availability of a large talent pool of finance professionals;
- compensation structures within the more established institutions that did not reward younger talent as quickly or handsomely as hedge funds were able to do;
- a broadly favourable political, tax and regulatory climate;
- increasingly sophisticated technology, facilitating not only the development of new trading strategies but allowing business support functions to be provided at a much reduced headcount; and
- the growth of support industries such as the third party administration industry and other outsourcing models, allowing new asset management business to get to market quickly and relatively inexpensively compared with building in-house expertise.
Much as in the United States, the UK hedge funds industry exploded in size throughout the early and mid-noughties as more and more institutional asset allocators, sovereign investors and private wealth aggregators embraced alternative asset classes.
Then, in 2008, the hedge funds industry was deeply affected by the tumultuous events of the financial crisis. Lehman Brothers, Bear Stearns and Bernie Madoff combined with the overall dearth of liquidity and other factors to cause mass redemptions, depressed portfolio valuations, fund liquidity issues and other strife.
The industry overall has now emerged from that period and the mood is more buoyant, with assets under management back up to pre-crisis levels and considerable fundraising activity. However, danger lurks ever close in the form of aggressive regulatory initiatives and increases in personal taxation, among other things. Much has been made in the media of such factors contributing to managers leaving the UK for jurisdictions that are perceived as being more accommodating. In the main, this is overstated. For most hedge fund managers, for the moment at least, these issues present reasons to evolve and adapt their businesses, but not a reason to leave.
Only appropriately authorised persons can carry on a regulated activity by way of business in the UK. It is a criminal offence to breach this requirement. Any agreement entered into by a person carrying on a regulated activity in contravention of this provision is unenforceable against the other party, and the other party is entitled to recover any money paid and to compensate for any loss sustained (Klein & Zur 2009).
UK-resident managers or advisers of offshore hedge funds will be carrying on certain regulated activities such as discretionary investment management and/or giving investment advice dealing as agent and arranging transaction on behalf of the fund. This means that they will need to be authorised and regulated by the FSA and will be subject to the FSA’s rules. It is usually the case with offshore fund structures that the person regarded as the operator/manager of the fund will also be offshore and that the UK regulated entity is merely its delegate. This means that a UK manager will normally be subject to the EU Markets in Financial Instruments Directive (because it cannot benefit from the exemption for operator/managers of collective investment undertakings), and thus its regulation will stem in part from EU requirements (Klein & Zur 2009).
For the hedge fund itself, the operational requirements will depend on the laws and regulations of the jurisdiction in which the fund has been established (Klein & Zur 2009). However, it would be usual for the fund to appoint the following service providers to assist with the operation of the fund:
- An administrator. The main roles of the administrator will be to calculate the net asset value (NAV) of the fund, deal with subscriptions and redemptions, calculate the fees that are payable to the fund manager and provide corporate and secretarial services.
- One or more prime brokers. The main roles of the prime broker will be to provide clearing and settlement facilities for the trades of the hedge fund, trade financing, securities lending, custody services, leverage and margin trading facilities.
- Custodian. The custodian will take custody of the assets of the hedge fund. Whether an independent custodian is required may depend on the role being performed by the prime broker; it is possible for the prime broker to also act as custodian.
- Auditors. The auditors will need to be familiar with hedge fund accounting and should provide a level of independent oversight on the activities of the hedge fund. Some offshore jurisdictions require that the appointed auditors are physically based in that jurisdiction (Oppold 2007).
Additional requirements of UK legislation particularly relevant to hedge funds include rules relating to market abuse and insider dealing; disclosures of interests in shares and related derivatives above certain levels (which may be as low as 3 per cent); and disclosures of net economic short exposures to certain financial sector companies and companies subject to a rights issue (Oppold 2007).
As noted above, the UK is not typically used as a domicile for hedge funds, but it is a popular location for investment managers of hedge funds, and this is in part because of the Investment Manager Exemption (IME) (Parry 2000). Provided certain conditions are met, the IME ensures that a UK investment manager managing a non-UK hedge fund will not constitute a permanent establishment of the hedge fund in the UK. The IME enables a non-UK resident fund that is trading for UK tax purposes to appoint a UK-based investment manager without the risk of that part of the fund’s profit that is attributable to the activity of the investment manager in the UK becoming subject UK tax.
The qualifying conditions for the IME are:
- the UK investment manager must be in the business of providing investment management services;
- the transactions carried out by the UK investment manager must be carried out in the ordinary course of that business;
- the investment manager must act in relation to the fund in an independent capacity. This will be met if the relationship between the manager and the non-resident fund (having regard to its legal, financial and commercial characteristics) is a relationship between persons carrying on independent businesses that deal with each other on arm’s length terms (Riviere 2010; Sami 2009).
From a regulatory perspective, UK funds available for sale to the general public in the UK fall within one of the following categories: for open-ended funds, either an undertaking for collective investment in transferable securities (UCITS) or a non UCITS retail scheme (NURS); or for closed-ended funds, the investment trust company may be utilised (Sami 2009).
UCITS and NURS can be structured either as OEICS or AUTS; the regulatory framework is substantially the same regardless of the legal form of the fund. Both are regulated funds which require authorisation from the FSA and must comply with detailed FSA rules (Sami 2009; Schmidt 2007).
UCITS funds are established and operate within the detailed regulatory framework contained within the UCITS Directive (2009/65/EC)(UClTS IV) and its associated implementing directives and regulations. UCITS offer a high degree of investor protection. One of the key advantages of a UCITS fund is that it can be marketed to investors throughout the EU without the need for additional, local authorisation in each country known as the ‘UCITS marketing passport’.
A NURS provides a similar level of investor protection to that of a UCITS and allows the manager more flexibility in terms of the investments the fund can make, for example, NURS can invest in real property and some types of commodities. However, a NURS does not benefit from the UCITS marketing passport (Schmidt 2007).
OEICS are authorised by the FSA under the Open-Ended Investment Companies Regulations 2001. OEICs are governed by these regulations, FSMA and the FSA rules.
Market practice in the UK is that OEICs usually have only one director (commonly referred to as the authorised corporate director (ACD)) who must be a body corporate and an authorised person with the requisite permission under FSMA. In the context of a UCITS fund, the ACD may be an EEA firm operating as the manager of the fund under the UCITS management company passport (Singh 2011; Singh & Aitken 2010).
An OEIC must have a depositary that is independent from the ACD. The depositary is responsible for the safekeeping of the property of the fund and also has certain oversight and monitoring functions in relation to the activities of the ACD. The depositary must be a body corporate incorporated in the UK or another EEA state. Its affairs must be administered in the country in which it is incorporated, and it must have a place of business in the UK. It must also be an authorised person with permission under FSMA to act as the depositary of an OEIC ((Singh 2011; Singh & Aitken 2010).
AUTs are governed by FSMA, the FSA rules and the general law of trusts. The trustee and manager of an AUT must both be bodies corporate incorporated in the UK or another EEA state; each of their affairs must be administered in the country in which it is incorporated, and they each must also be an authorised person with permission under FSMA to act as the trustee or manager (as applicable) of an AUT. The trustee and manager must be independent of each other. The trustee is the legal owner of the assets of the AUT holding them on trust for the investors and will have certain oversight and monitoring functions. The manager is responsible for the day to day management and operation of the AUT. In the context of a UCITS fund, the manager may be an EEA firm operating as the manager of the fund under the UCITS management company passport (Tiffith 2006).
For both UCITS and NURS funds, whether structured as an OEIC or an AUT, there are very detailed operational requirements (Turner 2009). The FSA’s rules in the Collective Investment Schemes Sourcebook contain comprehensive provisions governing the following:
- The fund’s constitution.
- Pre-sale information for investors. This includes preparing a detailed prospectus, key investor information for UCITS funds and key features for NURS funds.
- The ongoing provision of information to investors. A short report and a more detailed long report are produced half yearly and annually.
- Procedures for making changes to the fund including the circumstances requiring prior investor approval, circumstances requiring prior notification to investors and post event notification obligations.
- The investment and borrowing powers of the fund. There are very detailed rules on the types of investment which can be held (which include transferable securities, most types of financial derivatives, regulated funds, money market instruments), the spread of investments, the limits on global exposure, counterparty risks and concentration. Physical, naked short selling of securities is not permitted although the use of financial derivatives to achieve the same economic exposure is permitted. For UCITS funds, these rules are derived from the UCITS IV Directive and relevant implementing measures. For a NURS fund, the requirements are similar, but there is more investment flexibility. For example, NURS can invest in real property, gold and unregulated funds.
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